If you simply look at the numbers, the first quarter sales report from the Motorcycle Industry Council could send you running for cover. ATV sales were off 10.7 percent and total motorcycle sales were down 7 percent.
But there are several factors contributing to these declining sales that make the situation more encouraging than it may seem at first. (Also see Don Brown's year-end forecast. — Ed.)
The slowdown might have more to do with overall economic conditions than it does with a saturation of the market or a lack of desire to buy product.
Look at the leisure industry as a whole: It's stuck in a trough of soft sales. This applies to boats, RVs, cruise trips and powersports. If you step back, you'll see that motorcycle sales are holding up the best of any in this segment, and ATV sales are somewhere in the middle of the pack.
Joe Hovorka is an analyst with Raymond James who follows the leisure industry. "They've all pretty much slowed at the same time — boats, RVs, cruise lines. That would suggest that it's cyclical," he says. Hovorka points out, however, that ATV sales have been softening since late 2005. Last year, ATV sales were off 3.5 percent.
Tim Conder, leisure analyst with AG Edwards, concurs. "We're not surprised by these [numbers] at all," he says. "This is probably attributable more to the macroeconomic environment in the U.S. Growth has been slowing for over a year, and personal income hasn't been very strong. We definitely don't think that there is saturation in these markets."
Conder points to soft housing markets in big powersports states like Florida and California. His research shows that housing sales correlate closely with sales of core ATVs and other discretionary purchases. (Conder defines core ATVs as utility ATVs produced by MIC reporting members, not UTVs or units manufactured by non-MIC firms.)
Conder's research, which goes back to 1985, shows:
- A 94.6 percent correlation between sales of existing homes and ATV sales. So when sales of existing homes increase, sales of ATVs increase at about the same rate. (The correlation changed in 2006 when ATV sales slowed early, but existing home sales continued strong until fourth quarter.)
- ATV sales correlate strongly (85.4 percent) with housing starts.
- A reverse correlation between ATV sales and refinancing activity (–33.9 percent). Consumers aren't using extra cash from a refinancing to purchase toys.
- A high negative correlation between ATV sales and 30-year fixed mortgage rates (–83.9 percent). As mortgage payments increase, discretionary spending decreases.
"If housing is going well," Conder says, "that typically means that interest rates are pretty favorable, so people are willing to buy other products. " This ties back to the negative mortgage rate correlation.
So when housing sales pick up again, say in 2008 or 2009, will there will be an upswing in ATV sales? Conder's not willing to go that far. "We can't say that because in the recent short term ATV sales were down while housing activity was still up," he notes.
Weather had an affect on first quarter sales. On-highway sales were up 8.8 percent in March, but that increase couldn't make up for slow sales in January and February due to lousy weather, so the overall quarter was down.
Finally, consumers are shifting to UTVs, kid quads and small displacement dirtbikes made by Chinese manufacturers.
None of the Chinese and Taiwanese companies that sell substantial numbers of small-displacement ATVs and dirt bikes in the United States report their sales figures to the MIC ("Mainland China Takes Over," May).